Introducing Sustainable “ESG” Investing

Different terms are used in ethical investing, such as responsible, sustainable or socially responsible investing.  Companies are encouraged to promote practices including environmental stewardship; consumer protection; human rights and support the social good. One focus is on environmental, social justice and corporate governance (ESG) issues.

In a previous article, Quintin Rayer introduced ethical investment.  In this follow-up article, he looks at sustainable investing with its focus on ‘ESG’ factors.

Q G Rayer (2019), Introducing sustainable “ESG” investing, The Private Investor, the newsletter of the UK Shareholders’ Association, issue 200, June, p10-11, 19th June 2019.


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In a previous article, Quintin Rayer introduced ethical investment. In this follow-up article, he looks at sustainable investing with its focus on ‘ESG’ factors. Different terms are used in ethical investing, such as responsible, sustainable or socially responsible investing (for definitions of these terms see [1]). Companies are encouraged to promote practices including environmental stewardship; consumer protection; human rights and support the social good [1], [2]. One focus is on environmental, social justice and corporate governance (ESG) issues.

Sustainable Investing

Ethical BehaviourIn sustainable investing, funds are directed into companies with business practices capable of being continued indefinitely without causing harm to current or future generations, or exhausting natural resources (i.e. not ‘unsustainable’). A key definition for sustainable investing comes from the 1987 Brundtland report in which sustainability is defined as ensuring development meets the needs of the present without compromising the ability of future generations to meet their own needs [3]. The UN Principles for Responsible Investment (PRI), launched in April 2006 [4] linked sustainable investment with environmental, social and governance (ESG) factors [5].

ESG Investing

  1. Environmental, including CO2 emissions, or carbon-intensity; forest and woodland degradation; pollution; usage of scarce resources; mining activities which generate toxic by-products; intensive agricultural methods and so on.
  2. Social, including corporate social responsibility (CSR); child labour; modern-day slavery; hazardous and exploitative working conditions, including ‘zero hours’ contracts; aggressive corporate tax reduction methods; and displacement of indigenous peoples.
  3. Governance; weak internal corporate controls may let management circumvent company policies, increasing risks of irresponsible behaviours, corruption and bribery. Weak governance may mean that non-executive directors do not hold executives in check, with possible damage to the company as well as the owners’ interests, and increased risk of excessive executive remuneration.

Outsourcing and Externalisation

Companies may outsource production to countries or other companies operating less sustainably. A company might claim ethical operations, while not looking too deeply into its suppliers’ practices. Best practice requires companies to scrutinise their resource chains and monitor the entire production process, from origin through to ultimate disposal of products after use.

The costs of production can also be externalised [6]. Companies consume resources and create waste. Ideally, all costs associated with resources consumed and waste disposal during manufacture would be included in the price of goods created, including disposal after use.

Externalising costs can also apply to forcing labour to subsidise activities and saving money with potentially health-damaging practices or inadequate wages. Failure to invest in appropriate governance and management structures can result in company staff undertaking activities boosting earnings, but with the tab ultimately being picked up by society or taxpayers. The company saves money on management and governance, while the taxpayer pays the cost of dealing with problems that may arise as a result. The company externalises these costs to the taxpayer when it should pay them itself.

Why this Matters

Individuals may recognise the challenges facing humanity as a result of threats such as global warming, as well as many social issues. Global awareness of corruption also raises recognition of the importance of good governance. Sustainable ESG investing is one approach to addressing these challenges.

Beyond retail consumer choices, more people are using ethical considerations to guide their investments as well. In February 2019, according to the Investment Association, there were £16.8 billion of assets in the UK ethical funds sector, an increase of £1.4 billion since February 2018 [7].

Sustainable investors select companies that help tackle the challenges of environmental, social and other problems while avoiding companies that engage in unsustainable behaviours. They use the influence of financial markets to reward companies with positive behaviours while reducing capital available to those participating in unacceptable activities. Individuals can direct their savings into ethical investment funds and can often make decisions regarding pensions savings so that these are also invested ethically. In short, ethical investors seek to “do well, while doing good”.

References

[1] C. Krosinsky and N. Robins, Sustainable investing, the art of long-term performance, London: Earthscan from Routledge, 2008.
[2] C. Krosinsky, N. Robins and S. Viederman, Evolutions in sustainable investing: strategies, funds and thought leadership, John Wiley & Sons, 2012.
[3] G. Brundtland, “Our common future, from one earth to one world: an overview by the World Commission on Environment and Development,” 1987.
[4] Principles for Responsible Investment, “About the PRI,” [Online]. Available: https://www.unpri.org/pri. [Accessed 29 April 2019].[5] PRI, “Principles for Responsible Investment,” UNRP Finance Initiative and UN Global Compact, https://www.unpri.org/pri#Download_our_brochure_in_the_following_languages, 2018.
[6] J. Porritt, “The world in context: beyond the business case for sustainable development,” Cambridge: HRH The Prince of Wales’ Business and the Environment Programme, Cambridge Programme for Industry, 2001.
[7] Investment Association, “PDF ARCHIVE OF STATISTICS,” Investment Association, February 2019. [Online]. Available: https://www.theinvestmentassociation.org/fund-statistics/full-figures/. [Accessed 26 April 2019].


 

About Dr Quintin Rayer

Quintin is a Chartered Fellow of the Chartered Institute for Securities and Investments, a Chartered Wealth Manager and holds a Physics degree from Imperial College London and a Physics doctorate in atmospheric physics from Oxford University and is a Fellow of the Institute of Physics.